Tupy S.A. (TUPY3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Earnings Conference Call of Tupy S.A. for the Third Quarter of 2025. This conference is being recorded, and the replay can be accessed on the company's website at ri.tupy.com.br. The presentation is also available for download on the IR platform and website. [Operator Instructions] Before proceeding, I would like to reinforce that forward-looking statements are based on the beliefs and assumptions of Tupy's management and on information currently available to the company. Such statements may involve risks and uncertainties as they refer to future events, and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should consider that events related to the macroeconomic environment, the industry and other factors may cause results to differ materially from those expressed in such forward-looking statements. The following executives are present at this conference call. Rafael Lucchesi, CEO; Rodrigo Perico, CFO; Ricardo Fioramonte, Vice President of Sales; Toni Bueno, Vice President of Procurement and Logistics; Gueitiro Genso, Vice President of New Business Innovation and IRO and the Tupy IR team. I would now like to give the floor to Mr. Lucchesi, who will start the presentation. Mr. Lucchesi, you can continue.

Good morning, everyone, and thank you for attending this conference call. The climate of uncertainty observed since last year intensified through the third quarter of 2025. In the United States, increased tariffs and trade barriers have heightened inflationary pressures directly impacting interest rates and purchasing power. This scenario has reduced the confidence of both businesses and consumers. This context and the drop in freight prices in the United States has led transportation companies to postpone fleet renewals and new investments, while awaiting more consistent signs of economic recovery. As a result, OEMs, which are our main customers, are directly impacted by these effects and have been reducing their inventories. The result has been that commercial vehicle production has been lower than the volume of sales. In Brazil, the combination of high interest rates and the slowdown in agribusiness also negatively impacted sales of heavy and extra heavy commercial vehicles. In this context, our sales in tons showed a decrease of 15% to preserve working capital and cash flow, we further reduced the volume produced. These combined effects impacted the period's EBITDA by approximately BRL 210 million. Although the scenario is adverse and has resulted from external and circumstantial factors. Internally, our actions are focused on adapting operations to this new reality. At the same time that we make structural changes to build a more efficient company, reduced fixed costs and increased profitabilities when volumes are recovered. In this environment, capital allocation disciplines, it becomes even more essential. Despite the challenges, we have reached the best operational cash generation in history for a third quarter, BRL 383 million. New businesses have played an important role in diversifying our revenue, especially in the segments of replacement parts, energy and decarbonization. These are markets with a high potential of growth and profitability. In our core business, we expanded the offering of products and services with higher added value. It's also worth highlighting MWM's performance whose margins have consistently exceeded estimates, reaching 11% in this quarter. Now I'll hand the floor over to Rodrigo Perico, our CFO, who will present the indicators for the third quarter.

Thank you, Rafael, and good morning, everyone. Revenues totaled BRL 2.4 billion in the period, representing a 13% decrease compared to the same period of last year, 48% originated in South and Central America, 35% in North America, 14% in Europe, and the remaining 3% Asia, Africa and Oceania. In the segment analysis, 83% of revenue came from structural components and manufacturing contract segments, which includes cast iron products and high value-added services, such as machining and component assembly. 9% were generated by Distribution segment, mainly responsible for the sale of spare parts and 8% corresponded to the energy and decarbonization segment with emphasis on generator sets, in-house manufactured engines and solutions focused on decarbonization. On the next slide, in the domestic market, revenues from the structural components and manufacturing contract segment were impacted by a drop in sales for commercial vehicles and passenger cars and the reduction in volume of indirect exports, partially offset by increased sales for off-road applications, which had positive performance in the period. In the International market, revenues declined due to lower demand for medium and heavy commercial vehicles in the United States, reflecting uncertainties related to tariffs and their effects on inflation and interest rates. These were partially offset by sales performance for light commercial vehicles market and the European market as well as improvements on the off-road segment, especially in nonresidential construction applications. The highest value-added products reached 45% of this unit's revenue, highlighting the strategic relevance of solutions with greater technical complexity and higher contribution to profitability continuing have aftermarket unit. Wholesales accounted for 12% of domestic market revenue, 13% increase in the Brazilian market, reflecting the performance of new product lines, master parts and optional as well as the expansion of channels and operational efficiency gains that impacted productivity. Next slide, we show the performance of energy and decarbonization unit. Segment registered a 45% increase in Brazil, driven mainly by strong growth in sales of generator sets and proprietary engines. This unit accounted for 16% of domestic market revenue and 2% of export market revenue. Next, we have the cost and expenses for the period. The drop in production volumes exceeding sales levels reflected in the dilution of fixed costs impacted the gross margin, which reached 13% in the period. We also observed inflation in services and labor, which was partially mitigated by cost reduction initiatives, restructuring and productivity gains. Expenses fell by 9% in the quarter and 4% in the first 9 months of the year, reflecting lower sales volumes, reduced infrastructure and other efficiency gain initiatives. Next, we highlight at the top, the adjusted EBITDA, which totaled BRL 165 million in the third Q '25 with a margin of 7%. The margin for the traditional business reached 5% in the quarter, reflecting a double-digit drop in sales and production volumes impacting operational efficiency and resulting in poor dilution of fixed costs and expenses. The impact of these factors in the quarter was BRL 210 million. In other words, if we had the same levels as in the third Q of '24, EBITDA would have been BRL 375 million. MWM's operating margins was 11% in the period, an increase of 4 percentage points compared to the 3Q '24, driven by the implementation of factory and organization optimization projects and improved product mix. In the chart below, we highlight the evolution of net income in the third quarter of '25, mainly influenced by operating income and partially offset by financial results and a lower effective income tax rate, resulting from exchange rate fluctuations on the tax base. Looking at the financial results for the period. Financial expenses increased by 6% compared to the previous year. The effects of the interest rate hike in Brazil, which impacted the provision for interest in local currency were mitigated by the reduction in indebtedness with a repayment of BRL 366 million during the first half of the year. Financial revenues totaled BRL 38 million lower than the amount recorded in the same period of the previous year due to a lower amount of cash in reals. And the results adjusted for exchange rate variations, we recorded revenue of BRL 11 million explained by 2 factors, positive variations of 3 million, management initiatives regarding foreign exchange exposure mitigated the effect of real depreciation on balance sheet accounts in foreign currency. And positive results of hedged transactions with revenue of BRL 8 million, BRL 8.5 million were mark-to-market gains and expense of BRL 0.5 million with cash impact. Then we have the variations of main working capital accounts using the second quarter of '25 as a basis for comparison. Accounts receivable balance decreased by BRL 276 million in the period, with an impact equivalent to 7 days of sales on the average collection period. The indicator was impacted by the higher concentration of amounts received in the third quarter, a reduction in sales volume, a depreciation of real against the dollar compared to the previous quarter, affecting accounts receivable and foreign currency which represented 61% of the total. In the inventory section, there was a reduction of BRL 62 million, a result of management initiatives, especially regarding work in progress. And in accounts payable, there was a reduction of 2 days, a consequence of the lower volume of purchases and currency appreciation. Next, operating cash flow reached BRL 383 million, the best result in the company's history for a third quarter, representing an increase of 69% compared to the previous year, mainly due to higher cash inflows, lower payments to suppliers and various working capital management initiatives, including inventory reduction. These internal initiatives ensure that even with the sharp drop in volume, the company generated BRL 212 million in cash after investments and debt payments. Efficiency in working capital with consequent cash generation and efficient cash capital allocation with positive EVA across our plants are important goals that underpin all actions to adapt the production footprint and produce efficiency gains that we have been sharing with you. And finally, the net debt at the end of the third quarter 2025 was BRL 2.3 billion, stable compared to Q3 2024. Leverage corresponds to 2.58x the adjusted EBITDA of the last 12 months was impacted by lower accumulated EBITDA. Net debt, in turn, showed a slight reduction compared to recent quarters. Foreign currency obligations represented 58% of the debt. On the other hand, 50% of the cash balance was denominated in foreign currency. We ended September 2025 with a cash position of BRL 1.7 billion. Now I'll hand over to Ricardo, Vice President of Sales.

Thank you, Rodrigo, and good morning, everyone. Well, as Rafael and Rodrigo mentioned, the uncertainties about tariffs and their impact on the global economy have affected activity in some sectors that are important to us. It's important to highlight that the drop in sales we experienced in this year is concentrated in medium and heavy commercial vehicle segment, while the light commercial vehicle segments, including pickup trucks and off-road equipment, have been performing well. This is clear when we analyze clients' results. In the United States, we have a combination of negative factors that not only caused a major reversal in expectations for the year, also continue to put pressure in truck sales. The road freight transport sector is currently experiencing a recession with tight margins due to low freight prices. and they are postponing purchases. As we always highlight, demand disappears since the equipment -- it's a pent-up demand. It doesn't disappear because the equipment continues to be used. In Europe, however, signs are more favorable. Fleet replacement is already showing signs of recovery, which could show the beginning of a recovery. In Brazil, we experienced in second half of the year that's very different from the first as uncertainties and the high cost of financing have begun to affect confidence and willingness to invest, especially in agri business, which is a significant buyer for heavy trucks. However, fundamentals remain favorable and a possible reduction in interest rates could trigger a recovery. As I mentioned, all the other markets in which we operate have been showing positive performance. For example, in Brazil, the pickup truck segment to which we have significant exposure is growing at rates higher than the overall market vehicles -- of vehicles. In the United States, we are benefiting from the reintroduction of engines that were withdrawn from the market in 2023. In the Machinery segment, the market has shown positive numbers, driven mainly by the nonresidential construction segment and demand for larger motors used in solutions for data centers, for example. On the next slide, I want to detail the current situation of the medium and heavy commercial vehicle market in the North America. Production of automakers has fallen more than sales, an effect caused by transportation companies postponing purchases and high inventories. This scenario of production adjustments and inventory adjustment is expected to extend into part of 2026. For Tupy, however, the recovery tends to occur before public data shows a rebound since our products are used in the initial stages of the production chain. Moving on to the next slide, I want to talk about the impact of the tariffs on our business. Since November 1, the vast majority of our products have been subject to a 25% tariff instead of 50% in -- which were in force until that, which puts us on a more competitive level compared to other countries. Parts produced in Mexico are currently exempt as a result of USMCA agreement. The mitigation agencies, such as transferring inventories in the United States, changing logistics routes and transfer of part of the production to Mexico will allow us to prevent impacts in 2025. The reduction of tariffs to 25% makes us more optimistic in terms of mitigating impacts on the long run. It's important to highlight our presence on 3 continents that's a significant competitive advantage. We have built a unique arrangement in the industry that allows us to allocate products across different plants. This represents a risk mitigation control and at the same time, allows us to offer products that help our customers meet regional content requirements. This differentiation has allowed us to acquire new contracts, which, as we have announced, will generate additional annualized revenues of BRL 1.4 billion when they reach maturity. Some of these contracts will enter production in early 2025, and our products with a higher percentage of added value, such as machining, subassembly services, which will contribute to enrich the mix of products with a positive impact on margins. Now I'll give the floor to Toni, our Vice President of Procurement.

Thank you, Ricardo, and good morning, everyone. On the next slide, I want to give an update on the operational efficiency projects we announced in the second quarter. We made acquisitions in the traditional business that generated several benefits in the areas of sales, procurement and logistics, but also brought idle capacity. It's important to clarify that the reduction in capacity is not a response to current factors. We are currently experiencing a downturn in the market cycle, but we don't see any changes in the fundamentals of the sectors in which we operate. Our synergy plan already took into account the adjustment of production capacity and inventory levels. This process started in Mexico in 2024 and will be fully implemented by December '26. This reorganization will result in a reduction of 25% in capacity compared to the post-acquisition scenario of Aveiro and Betim plants. It's a significant number, but in line with our integration synergy plan. The effects of these actions will begin to be felt next year with an annual impact of BRL 100 million in '26 and BRL 180 million per year starting in '27, resulting mainly from reduction in fixed costs. In other words, these are gains that are independent of a recovery of volumes. The new capacity will allow us to meet current customer demand, taking into account increasing volumes in '26 and future growth through the acquisition of new contracts. It's a complex project involving 3 plants and comprising 100,000 hours of design and execution. In the third quarter, efforts were directed towards making the plants more flexible with development of tooling and processes necessary for product transfer as well as customer approval. On the next slide, I'll discuss our other operational efficiency initiatives. We aim to achieve a ROIC above the cost of capital in each of the geographies we operate, even in a challenging volume scenario. To achieve this, we are implementing an aggressive efficiency and cost reduction plan with initiatives focused on automation, maintenance workforce productivity and quality. This plan is in additional to what I mentioned previously and should positively impact our margins by up to 2 percentage points when they reach full maturity in the end of 2026. Regarding capital allocation, we reduced inventory by BRL 62 million in the quarter, and we'll have additional gains of BRL 200 million by December this year, resulting from production planning actions and actions with the supply chain. Now I'll give the floor to Gueitiro, our Vice President of New Businesses and Innovation.

Thank you, Toni, and good morning, everyone. Today, I'll comment on the performance of our subsidiary MWM. In this quarter, the EBITDA margin reached 11%, an increase of 4 percentage points compared to the previous year. Continuous improvement of our operational processes, negotiations with suppliers and revision of commercial policies have contributed to this performance, which is even higher than projected in our business plan. MWM's revenue remained stable year-on-year, impacted by the manufacturing contract business, which is directly related to the performance of the truck market in Brazil. On the next slide, I want to address the aftermarket and energy and decarbonization businesses, which together accounted for 28% of domestic market revenues and 15% of total revenues. These are segments with low correlation to the company's core business and which will have an even greater relevance in the future. In the replacement car segment, sales increased by 6% in the quarter and 13% in the first 9 months of the year, with particular emphasis on the master parts and optional accessories lines, which advance more by 40% and already account for 20% of revenue. The expansion of the portfolio, inclusion of new distribution channels contributed to the third quarter '25 having the best historical sales performance for this business unit. This is a countercyclical segment that benefits from scenarios of declining sales of trucks and machinery. We're also very pleased to announce that the month of October saw the highest monthly revenue in our history. We are growing and without sacrificing high margins that characterize this business. We also completed the reorganization of the parts distribution center, increasing productivity by 38% with positive effects on revenue and profitability. In the energy and decarbonization unit, sales of generator sets a segment in which we're leaders in Brazil grew by 36%. Sales of MWM's proprietary engines used mainly by small OEMs also showed strong growth. In recent months, we have seen a significant increase in demand for these solutions in various sectors, such as agribusiness, urban passenger transport and waste collection. We announced a commercial and technological partnership with Yuchai, one of the world's largest engine manufacturers. The agreement includes opportunities such as development of biomethane and ethanol engines as well as distribution of spare parts and expansion of product portfolio with emphasis on large-scale applications such as workboats and generators for data centers. We also started operating bioplant located in Ouro Verde do Oeste, near Toledo and Paraná with the current capacity of 1,440 cubic meters per day of biomethane and 20 tons of fertilizer per day. The second semester is -- will be dedicated to validating adjusted manufacturing process and sales models. In parallel, the company is proceeding with the licensing construction plan for bio plants Divinópolis, Minas Gerais, Ceará and Santa Catarina, which will increase the total combined capacity to more than 300 tons of fertilizer per day and 11,400 cubic meters of biomethane. I thank you all for your attention. We'll now start the Q&A session.

[Operator Instructions] Our first question comes from Fernanda Urbano from XP.

We have 2 questions here. First, I would like to start exploring the North America dynamics. You mentioned higher pressure on prices and normalization of inventory levels by OEMs. And we see the challenging dynamic in heavy-duty vehicles. Do you see any signal of improvement for the fourth quarter or at least a stabilization of this situation? And I'd like to understand how you see the dynamics per category. Heavy-duty vehicles, off-road vehicles. What's the base scenario and the recovery time line? And the second question is a follow-up about the capacity usage. In the last conference call, you mentioned that you were using 65% of decrease in capacity and the ideal level would be 62%. So could you give us some light on the current level?

Fernanda, this is Ricardo Fioramonte speaking. About your first question, Well, there's a little visibility right now regarding the resumption of sales of commercial vehicles in the United States. The sentiment is that we are at the bottom at a very low period and it's expected -- sales are expected to resume in the beginning of 2026. An important factor to pay attention to is orders that will come next week and until the end of the year. Talking to our customers, we've been to the United States, and I've seen our clients there recently. Section 232 now applied to truck sector and its chain, although it may seem strange because it has tariffs of 45%. It brings more predictability because since April, constant changes in tariffs and political policy -- commercial policies in a volatile way caused buyers to wait because they didn't know what they would pay for a truck. The delivery time is 6 months for trucks. And given the high variation of tariffs and the impact on their cost, the OEMs didn't know how to price trucks. So that had an impact of postponement. Let's wait and see what will happen by clients. So it's possible then that Section 232 will provide greater visibility and bring buyers to the market again. Off-Road, we see good results. Even surprising for this year, mainly due to the massive investments in data center construction, which have 2 positive impacts on us, generates demand for construction machinery as well as generators, large diesel engines where we provide parts to. And what we've heard by talking to customers in the United States that major players in this industry have a very robust chains with the backlog records in some cases. So that is something that will continue to sustain our sales and our economy for sure, during 2026.

Fernanda, this is Toni speaking. About your question about capacity, 65% to 80%. First, it's important to highlight that this movement starts from a static volume scenario. So that's basically the reduction that will happen until the end of 2026, and that happens at some levels or some steps. So we talked about the reduction of production lines. They don't happen at the same time. There will be some drops, 2 steps, let's say, during the year. As for the process, we are excited about the progress of this project. We need the support of our clients to make that happen. We had good responses, and we are actually doing better than scheduled and we have the support from customers to make that happen. And now this is happening with a structured way, testing motors and engines, validation of products and so on. We have a internal challenge to anticipate this movement as much as possible. There is a lot of pressure on reserves. So our goal is to advance these reduction as possible, as fast as possible. So considering current volumes, we will reach the end of the year with 80% occupancy.

The next question comes from Kiepher Kennedy from Citi.

Congratulations on the results. First, a follow-up on Fernanda's question regarding the plans. You mentioned that part of that reduction was being done with the acquisition of Teksid, and I imagine that an additional amount came from the downturn in the market. So regarding this 25% that the company mentioned, how much was already expected? How much was in addition? And my second point is, when I speak 25%, it seems high to me in principle. I know that several actions were made internally. But I would like to understand when volumes are resumed, how hard or easy it would be to reconnect these capacity to resume the capacity? I know it's not part of the plans of the company, maybe this is a structural reduction regardless of the size of the market? That's the first question. The second question is about MWM. We see excellent results, 11% margin proves the good work done by the company. So I would like to understand what do you see for a structural profitability of that business considering that you are increasing the portfolio of products for new markets on larger machines for data centers. What is the road map for growth and what are the possibilities for MWM?

This is Toni speaking. Thank you for the question. It's important to remember that we purchased a lot of idle capacity in the acquisition plan. And our plan already thought about this reduction based on our plans. So our plan is based on the reduction of lines with the higher cash cost. And with the -- and also lines that don't support higher products with higher technology embedded. So as I mentioned briefly in the last call, we went from 10 production lines to 7 -- between 7 and 8 production lines. And that already includes future contracts, so they include either in technology or volume, future products and new competitors in which we're participating. So this is not a restriction. On the contrary, we want to reduce bottlenecks for production growth and volumes in case of changes in the market volume. If the market oscillates, we are ready to respond quickly. Talking about Mexico. This plan was foreseen in the past, and Mexico became even more important in the current economic scenario. We reinforced execution on Mexico in several points and adapted the projects during execution. So we aligned the new market conditions. And now we are executing it in a disciplined way to make it faster as fast as possible.

This is Gueitiro. I will answer your second question about MWM. Let's talk about the idea behind the acquisition of MWM in the strategy of Tupy. MWM has 3 business units. The first is manufacturing contracts that fits the Tupy strategy better because that's the services unit that has the same OEMs as clients that Tupy delivers its products. But this unit is also affected by the seasonality of the market when the market is demanding less products. On the other hand, there are 2 business units that I mentioned in the call, but I would like to reinforce the anti-cyclical one that's offered aftermarket that has a very well-defined strategy. Every month, we've been able to attain higher volumes with record sales. And the strategy is to use what was being made for parts for MWM engines, but our master parts line was meant to meet the needs of engines. Only 1/3 of engines in Brazil are made by MWM built. There are 2/3 of engines that are not. So we're using the synergy, the distribution channels and MWM's strength as a brand is growing. So this is growing at a much higher speed than the MWM engine unit. And the third business unit is energy and decarbonization, which is new. There are several businesses under it. Some are more mature, such as generators, and other are under development, such as maritime motors and services. And it's also growing. And to wrap up this recent partnership with Yuchai will allow us to enter segments in which we didn't have the engines or the motors to enter such as data center or other sectors that were limited in terms of engine capacity. So MWM is great because this composition of the company in one part regarding B2B to OEMs and the other units are B2C. So as the company grows, we'll build this blanket that will allow us to go through seasonality periods with a good performance.

The next question comes from Gabriel Rezende from Itaú BBA.

I have 2 questions from Itaú. First, in line with your comment of working capital I would like to understand if there is an additional leap in terms of positive working capital for the fourth quarter of the month -- of the year. You said there was work in progress inventory. Should we expect any positive notes on that? And also, you mentioned the improvement in the allocation of production lines and optimization of plants. I would like to better understand how that relates to the tariffs dynamics between the United States and Brazil. How does the company see a possibility to lower its exposure to U.S. Brazil tariffs? And would it make sense for us to expect a higher volume due to the reduction of tariffs when compared to the previous quarter?

This is Rodrigo speaking. Thank you for the question. Yes, all this process, we've been talking about here, when we see a drop in sales volume, naturally, it's more difficult to us to decrease costs in production, and we have inventory for that. So we make that trade-off. There will be effects on our liquidity that affect the bottom line. As the working capital metric, yes, we could expect up to BRL 200 million additional in inventory.

Gabriel, this is Toni speaking. About tariffs, the connection between tariffs and our manufacturing footprint is the following. First, a basic concept of this footprint is flexibility. When we mentioned flexibility, we're talking about providing sourcing in 2 or more plants for our customers. That allows us to respond to different dynamics different from expected either in tariffs or in needs from customers. And that gives us a lot more resilience to our supply chain favoring our customers. So it's not only a dynamic that's related to tariffs. Tariffs can benefit from this footprint. But in general, it's greater than that because it provides a more flexible way of operating for our customers. Now talking about inventories. The reduction of inventory levels in this quarter only, I mean, since last quarter, we started producing less than sales volume to adapt to sales level smoothly without compromising availability of products to customers. Now we provided vacation to our employees in several plants, and that's what's supporting the significant reduction in inventory levels.

Just a follow-up, quick follow-up. Should this provide an extra burden on profitability in the third quarter -- on the fourth quarter?

Gabriel, this is Ricardo Fioramonte. No, we should not expect any different impact other than the impact already pointed out in the results of the third quarter. It's important to highlight that there's not such an impact. Because through mitigation measures, changing inventory -- sending inventory to the United States before tariffs became effective, moving part of the production to Mexico, which happened already or even changing logistic routes and making agreements with customers, we've solved that issue. It's important to highlight that right now, tariffs pose a risk but only an opportunity because that adds strength to the movement of regionalization of chains and our geographic positioning allows us to profit to benefit from that movement.

The next question is from Andressa Varotto from UBS.

We have 2 questions. First, I would like you to talk about new contracts. You said that there is a backlog and the company is announcing new contracts that would become operational in the second half of this year and next year. So I would like to recap on that. And also, if you could give some more color on the partnership with Yuchai. What do you expect from that partnership? Do you -- can you give us some incremental revenue figures regarding that? And also about margins. We see the company operating at margins below the historical levels. Do you have any projection as to what the company's margin could be after restructuring, considering a more stable volume scenario and a scenario in which volumes are resumed?

Andressa, this is Ricardo Fioramonte. About new contracts, well, 80% of these new contracts are related to new generations of engines that are being launched to -- in the market to our customers to meet a reduction of emissions requirements. And this new generation of motors are being located in the United States and North America regarding USMCA. And we -- our positioning gives us an advantage to win this contract. So these are new generation of engines that are being launched, given the emissions legislation and that will start to be marketed this year. It was not very visible this year because of the current situation of the market. We will see a greater impact as of next year.

This is Gueitiro, and I'll answer your question about Yuchai. Yes, in 2026, we'll start to see this result of this partnership in the sales and EBITDA in the decarbonization unit results, but not only in that unit because this has -- partnership has an effect in the aftermarket business as well. Yuchai is already operating in Brazil with engines for pickup trucks with its Yuchai customers from China that are coming to Brazil to offer products. So our network of spare parts distribution in Brazil will be the partnership for this aftermarket. So there's a gain there. And secondly, as Yuchai has a wide portfolio of products in engines, and it will allow us to escalate in industries that we are already working, evolving to other machines. For example, we are developing ethanol fuel engines for tractors in agribusiness in the ethanol producers, sugar producers because this is a good engine. And with this portfolio of products, we'll be able to have in this ethanol segment, providing parts to other machines and engines. Biofuels is the strength in Brazil of Brazil, biomethane. We see fleets of trucks, waste collection trucks and buses as well are being fueled and complementary with biomethane. So we will see that in 2026 with the sales coming from -- with the revenue coming from this partnership.

This is Rodrigo speaking. Thank you for the question. We have seen lower margins. You all know that our business is highly affected by the volume of sales and exchange rate, but the decrease in costs beyond a structure that's necessary that affects the EBITDA significantly. And as Toni mentioned, all the efforts are concentrated on this reduction of structure that at the end of the day, will help us to reduce costs. But in addition to that, there are other projects, especially when we talk about revising models, structures, processes in key areas such as manufacturing, quality, engineering, also sales, new contracts in more favorable terms. So there are many actions that are being taken. And that depend a lot more on the company than on the market. And as I mentioned, there are variables that are beyond our control. But let's think that a ramp-up in margin is quite sustainable for the year 2026.

Perfect. If you allow me to ask a follow-up question. You mentioned, the USMCA and next year, negotiations are expected to renew this agreement. Do you have any update or expectation regarding that? Is that being monitored as a trigger for the truck and heavy-duty vehicles market?

Andressa, nothing, there's nothing now that would allow us to make some comments. In addition to the expectation that we don't expect a lot of change in the agreement since what was built based on the -- since the implementation of NAFTA 30 years ago. What's interesting is that USMCA was created in the first Trump administration. So there is a sense of uniformity with the geopolitical vision of the current administration.

The next question comes from Gabriel Frazao from Bank of America.

I would ask -- like to ask a follow-up about cash generation and leverage. Could you share with us some additional initiatives that you may implement in the future if the markets remain low in the future to prevent the company from company leverage levels from being close to covenants. And when do you expect it to reach the peak? And what would be that level?

This is Rodrigo speaking, Gabriel. I think it's worth mentioning that when we talk about leverage of the company, there are company that is very high quality. We have long-term maturity dates, you've seen a pickup in that rate. But this is not something that has a negative effect on the company's liquidity. Ahead of us that are seasoning -- some seasonality in the quarters, the first and fourth quarters are always lower in results, given the characteristics of the industry. We are optimizing working capital, cost of operational costs. We reduced working shifts provided, gave vacation to all employees to prevent any unexpected downtimes. And we are affected by sales volumes, exchange rate and cost reduction. These 2 are factors that are out of our control, as I mentioned, and we act by reducing -- by optimizing working capital, monetizing the inventory that was created during this capacity reduction process, which provides a good improvement for the company and this improvement process, all this turnaround in terms of improvements in structure is also a gain. We save a lot of cash with that. So these are the actions we are taking. Again, that's not a liquidity issue, but the fact that we are having lower and lower EBITDA in the quarters according to the denominator and the metrics in which the denominator are of the past months. We'll continue to reduce working capital and inventory levels during 2026.

The next question comes from [ Nicolas Papiyanki ].

I'm sorry for the question, I guess some parts of it have been covered. For us, it's good to see that in the challenging context Tupy was able to generate cash with the gross debt with a good liquidity. But I would like to ask a follow-up about the leverage level. And how do you see the bond for 2021? That's quite stressed below $80, more than 8% yield in dollars. Could you make any comments on these aspects and leverage? And if there's any tender buyback operations. I would also like to clarify regarding covenants, what are the maintenance covenants? Is there a need to ask for a waiver or with which banks? And if needed, on what contracts would you need a waiver on?

This is Rodrigo speaking, Nicolas. A bit of what I answered to Gabriel, we have kept our leverage at controlled levels as reported in the third quarter, several actions ahead of us, especially regarding working capital, reducing inventory levels and other strategic actions mainly reduced to reduction of capacity. All that causes us to have an improvement in EBITDA in the future. As for our debt, it's very well negotiated at a very attractive cost. We are keeping a close eye to what's going on in the offshore market. Our role -- our share was very low, but that doesn't reflect the credit status of the company. And about covenants and waivers, well, for now, the company is always talking to investors, shares and debt, we are showing the uncertainty scenario impact on volume, all that puts pressure on our leverage. And we are keeping track of it. What matters is that the net debt of the company remains stable.

The Q&A session has ended. I would now like to turn the floor over to Mr. Lucchesi for his final remarks.

Thank you all for participating and for your questions. As we have said during this conference call, the commercial vehicle segment has been affected by structural factors. However, the fundamentals of this industry remains solid. The pent-up demand is being created, and we believe that will be resumed during the year of 2026. The nonresidential construction market is doing fine, and we see an improvement in indicators of light commercial vehicles in Europe. We have a lot of value to capture with in-house initiatives with flexibilization and operational efficiency that will contribute with significant gains in 2026 and will take place regardless of resumption of volumes. I'm confident that the actions we are taking today will strengthen the company that we're building. And for that, we count on the commitment and dedication of our entire team. Thank you all very much, and see you on the next quarter conference call.

The conference call of Tupy has ended. We thank you all for attending, and have an excellent day. [Statements in English on this transcript were spoken by an interpreter present on the live call.]